January 27, 2012

Nobody could have predicted . . .

Revenue Minister Peter Dunne says the Government will be forced to look at how it can tighten the tax system if the global economy deteriorates further.

For the first time yesterday, Prime Minister John Key conceded he might have to drop plans to return the Government’s books to the black by 2014-15.

In his first major speech for the year, he said the slowing global economy and the European debt crisis had forced Treasury to cut the expected surplus to less than $500 million from the $1.5 billion tipped before the election.

If the outlook worsened before the May Budget, more may have to be done to return the books to surplus or the target dropped altogether.

Dunne this morning said a global recession would force the Government to look at plugging tax loopholes, clamp down on tax avoidance and ensure the system was coherent and consistent.

How things change. Just a month before the election Treasury openly scoffed at the naysayers doubting their insanely optimistic growth projections. And when Labour insisted they could raise revenue by cracking down on tax avoidance, the National government just laughed.

The [Labour] party believes it can raise $300 million a year in additional tax with new anti-avoidance measures, a forecast greeted sceptically in a number of quarters, including the Beehive.

Finance Minister Bill English said that figure was very optimistic. National had already pursued “the low-hanging fruit”, he said, by giving the Inland Revenue Department money to enforce tax rules on property investment which were expected to return $800 million a year.

With that done, “there isn’t a whole lot of easy revenue gains left there”, Mr English said.

Some people have complained that there wasn’t enough emphasis on policy during the election campaign – it was sidelined by the RWC and the teapot tape scandal. Given that the policies of the parties were costed predicated on Treasury’s economic forecasts – which discounted the possibility of a European debt crisis, an event that has been regarded as inevitable for roughly eighteen months prior to the election – it’s a damn good thing we didn’t all focus on ‘the policies’, because with the exception of asset sales, capital gains et al, they were impossible fantasies.

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Should party policies be based on the worst that is predicted to happen? Serious question – in a quickly evolving international economic situation what should be the benchmark to base policies on? And whose opinions?

I think most people would have been aware that policies were optimistic snapshots that were unlikley to remain the same, and most voting decisions were made on perceived ability to deal with difficult economic times rather than policy specifics.

At least National and Labour policies were basd on theoretically feasible scenarios if all went well in the world. Many NZF, Mana and Green policies were pie in the sky even if the economic sun shone brightly.

“Should party policies be based on the worst that is predicted to happen?”

They should be based on realistic expectations of what might happen, surely. The point is that before the election the National Party openly scoffed at suggestions that treasury were being overly optimistic (or, more likely, on crack) and less than four months later – time they’ve spent been sunning themselves in Omaha – suddenly it’s all a different ballgame. What’s changed?

“At least National and Labour policies were basd on theoretically feasible scenarios if all went well in the world. Many NZF, Mana and Green policies were pie in the sky even if the economic sun shone brightly.”

Maybe in your world. It never sounded very theoretically feasible to me.

‘they were impossible fantasies’ do you mean as opposed to ‘possible’ fantasies. . . .?

The media are in part to blame for this lack of scrutiny, but they were aided and abetted by frothers who were looking for the next ‘exclusive brethren’ ‘dirt on JK’ shock/horror titbit in the hope it would somehow swing the election/pervert our democratic process. And guess what, it’s still going on! Only yesterday even in these here parts as I recall.

And if we are going to tilt at pie in the sky policies the Labour Party were floating stuff that would only fool someone who thinks that spare chits in their cheque-book ‘proves’ that there is still money in the bank account. They don’t bear repeating here as it was suggested in the herald that they were unbecoming of a mature political party, and to do so would be like mocking the afflicted.

I suspect that Treasury gets it right half the time and wrong the rest. Just like everyone else, except for those in the finance sector who have made a lot of money by gettting it right and that’s mostly by chance.

The orginal forecast was – things aren’t great but we can scrape by

The updated one is – things aren’t great and we’ll scrape by but by less

Since both Labour and National base their economic ideas on advice from Treasury, it really wouldn’t fiscally matter much who we got – they’d both be wildly out and both be singularly unable to work out why, because the very institution they get their ideas from is constrained against thinking of any alternatives. The concept that some kinds of economic changes could be made for reasons like justice or self determination, rather than fantasy book-balancing, never even comes up in our de-facto grand coalition.

Wild inaccuracies like what Danyl is noting here don’t even raise a ripple in our public discourse. Who remembers or even cares what was said leading into the election? The guy saying it for Labour isn’t even the boss 2 weeks later, and the other guy is already backtracking on all claims, except for the one that really mattered to him, the right to sell off something that I’ve been paying off my whole life, one of the few things we have that make NZ self-sufficient.

What amazes me is how National managed to sell how fiscally responsible it had been in direct opposition to the facts, which were a disastrous collapse in our economy right through their first term, during which they put taxes *down*, adding a whole heap to our debt plate, and how the Christchurch catastrophe wasn’t seized upon as the perfect time to stimulate internal growth with levied rebuild while we weather the international financial shitstorm. Which would have been a solution both effective and so obviously righteous that even a huge swathe of right wingers were for it.

…forced Treasury to cut the expected surplus to less than $500 million from the $1.5 billion tipped before the election

If Treasury and National could have forseen the degree of deteriorating outlook and campaigned on half a billion instead of 1.5 billion would it have made any difference to how most people voted? I doubt it.

Should National continue with their full asset sale program regardless of any further deterioration? Or should there be room to adjust that plan down as well?

>Not while the city was still falling down and oozing up. I haven’t seen a huge swath of anyone proposing an immediate rebuild. Not even opportunist political parties in a campaign.

Nor was I proposing an immediate in-place rebuild. I was talking about the readiness of NZ generally to pay for rectifying (to the best of our ability) this disaster directly, so long as the money taken is actually used for that. It would be nearly 100% spent on jobs for NZers, and growth for NZ businesses.

Well if people bothered to actually read the Treasury forecasts you would have spotted the Risks and Scenarios section http://www.treasury.govt.nz/budget/forecasts/prefu2011/18.htm#_tocEconomic_Risks in particular the downside scenarios that Tsy considered probable http://www.treasury.govt.nz/budget/forecasts/prefu2011/19.htm You could also read the assumptions to scenarios and the specific fiscal risks section but that is not as much fun as hindsight bias. How different people (politicians, media and bloggers) spin this is not something a government agency has much control over. Forecasts do change, in fact they will be out of date on their day of publication, the question is at their time of development where they developed on the best available information on an accepted forecasting methodology. If someone else has a better methodology that has greater predictive accuracy i’m sure economic forecasting agencies both public and private sector throughout the world would like to hear from you.

It seems to be a truism that this government, in particular, has an excellent record of ignoring anyone who knows what they are talking about if what they are saying conflicts with what they prefer to believe…and all the evidence in the world won’t change this approach.

I seem to remember Goff being pilloried for not knowing which year the Labour plan got back into surplus, and making the excuse that, well, circumstances can change things so much that for him getting that precise about that level of detail wasn’t important as long as the track was certain etc etc etc and getting cleaned up on it.
Perhaps he had a point?

In defence of Treasury, they invest a great deal of time and effort in generating a suite of forecasts, present them to the world for critique and, hopefully, learn from mistakes and historical forecast error

This is a much more robust process than that undertaken by a bunch of bloggers-with-vendetta’s and commentators on said blogs.

So treasury were over-cautious during a boom and over-optimistic during a bust. How the flip does that work?

Their projections probably include the impact of a counter-cyclical fiscal stance that assists a more rapid reversion to trend growth-rates.

No I only mean the ones that were saying treasury are being unreasonably optimistic in assuming we’ll be back in surplus in a couple of years. The ones mentioned in the comment I was responding to. Those ones.

In defence of Treasury, they invest a great deal of time and effort in generating a suite of forecasts, present them to the world for critique and, hopefully, learn from mistakes and historical forecast error

That “hopefully” seems a little hopeful. They were high in 2009, high in 2010, and high in 2011, and have made no substantive changes to their model that I know of. The basic problem is that there isn’t anything like the financial crisis in their data set (figures from the Great Depression would’ve helped), so the model keeps expecting a quick return to equilibrium that hasn’t eventuated. With enough data, the model will eventually learn this, but we might be dead by then. The old Treasury method of consulting experts to produce forecasts by sector probably would’ve worked better than simply putting faith in the model.

“substantive changes” above prolly should be “fundamental changes”, because they have tinkered with the model, but at heart it’s still a dynamic general equilibrium thing and both here and overseas dynamic general equilibrium things haven’t forecasted well post-crisis

Already another dismal post?
PG sounds just as a patronising as The Hair.’I think most people would have been aware that policies were optimistic snapshots…’ Well, the million odd that didn’t vote, mebbe,but I met lots of true believers. Never mind, a fool is a fool, so just a wee bit of collateral damage, eh, Pete?
Still, it’s nice to see little aridities like Phil and Merv discover new levels of shrill.

The basic problem is that there isn’t anything like the financial crisis in their data set (figures from the Great Depression would’ve helped)

Well, yeah… but there isn’t anything like the financial crisis in anyone’s data sets – you could use the various banking defaults of Eastern Europe, Latin America, and S.E. Asia as proxy, but they’re (by and large) developing economies, where the transmission mechanisms of banking sector failure through the rest of the economy are quite different to a developed, industrial, free market.

For the same reason, I’m not convinced that Depression-era data is that useful either.

Treasury’s model actually had a pretty good run up until the financial crisis — even their two-year ahead forecasts were pretty accurate. Since then, well, they’re not the only ones who have been way wrong, but they’re the most important.

The real problem is politicians of all hues presenting policy and costings based on a best-guess scenario only. Given the uncertainty inherent in forcasting, they should talk about what they will do under a range of scenarios.

National said they have a goal of getting back to surplus, but what they seem to have meant is their policies would bring about a return to surplus under one particular scenario. To have a goal means to continually adjust/adapt in the face of events to achieve the goal, but this doesn’t appear to be what National are doing.

Actually during the election campaign a journalist asked Bill English what they would do under different scenarios, and he said he didn’t think he should have to say. Of course this is exactly what voters need to know to be able to make an informed decision, but never mind that.